WASHINGTON — Two American scholars Monday won the Nobel Memorial Prize in Economic Sciences for their separate research examining the cause-and-effect relationships between economic policies, such as tax cuts and interest rate hikes, and the broader economy.
Thomas J. Sargent of New York University and Christopher A. Sims of Princeton University, both 68 years old, will share the $1.5 million award.
In announcing the prize, the last of the Nobel awards announced this year, the Royal Swedish Academy of Sciences said Sims and Sargent’s pioneering work in the 1970s and ‘80s had been adopted by researchers and policymakers throughout the world and helped in understanding how economic shocks and systematic policy shifts affect the economy in the short run and long run.
Sargent and Sims conducted their research independently, and one of the big challenges they faced was the-chicken-or-the-egg problem in economics, that is, whether policy affects the economy or the other way around. Because economics experiments are difficult to perform in the real world, the Nobel committee said “the laureates’ foremost contribution has been to show that causal macroeconomic relationships can indeed be analyzed using historical data, even in cases with two-way relationships.”
Their work is relevant today as the United States and Europe grapple with anemic growth, high unemployment and budgetary woes in the wake of the recent global financial crisis and recession.
The Nobel committee said analytical methods developed by Sargent and Sims could help answer such questions as: How are gross domestic product and inflation affected by a temporary interest-rate hike or a tax cut? And what happens if a central bank makes a permanent change in its inflation target or a government changes its goals in budget balancing?
Sargent, a native of Pasadena, Calif., and Sims, who was born in Washington, D.C., both received their doctoral degrees from Harvard University in 1968.
Sims said he was sleeping when he got the call from the Nobel committee early Monday informing him of the award.
“Actually, at first we were called twice and my wife couldn’t find the talk button on the phone so we went back to sleep,” he said, speaking by phone to a news conference in Stockholm, where the prize was announced.
Last year’s Nobel economics prize went to three researchers, including two Americans, for helping to explain such phenomena as high unemployment.